Ed Andrews Deserves More Credit For "Busted"

21 Jun 2009

Posted by Stan Collender

By his own admission, Ed Andrews is not a sympathetic character in his book, Busted. Life Inside The Great Mortgage Meltdown. In fact, he says right up front in the introduction that he was not a victim (page xii, the fifth page of the Introduction) of anything that happened to him and, at least as far as I can tell, doesn't ask for forgiveness from anyone but his wife.

That's a good thing because as the chief economics correspondent for the New York Times and a reporter that many, many people read on a daily basis, he should have known how deep the financial hole he was digging for himself and his family.

In addition, as almost anyone in the economic blogsphere knows (Megan McArdle over the The Atlanticlead the charge), Andrews has been heavily criticized for not including the fact that his wife had declared bankruptcy twice before. That he now admits that was a mistake doesn't make it any less important an omission.

But the fact that Andrews decided not to inform his readers that his wife had previous severe financial problems doesn't take away the fact that this is actually a very, very good and important book. For me, Andrews' wife's previous bankruptcies didn't detract from the story in at all.

Actually, this is two books.

The first is a very personal account of what Andrews himself went through a divorce, got a mortgage he definitely couldn't afford and then borrowed more with a refinance he could afford even less, maxed out his credit cards, and suffered through what is now the standard list of things people do when they get in this situation.

The result was personally devastating for Andrews and, honestly, frightening to me. My Beautiful and Talented Wife (the BTW) and I had a long talk about what Andrews did (I am intentionally not saying "what happened to Andrews" because he largely did this to himself) and rapidly came to the conclusion that, while it may be hard to take, it's not at all hard to understand. Andrews (and I guess lots of other smart folks in analogous situations) grasped for whatever apparent financial lifeline was available in the hope that the situation magically would get better soon. Either mortgage rates would go down, or home prices would go, or his wife would get a good-paying job, or ... Anyone of those would have greatly improved the situation. All of them happening at more or less the same time (as had almost been the rule the previous four years or so) would have saved the day for Andrews and his family. When none let alone any occurred, the situation quickly became desperate.

The BTW and I agreed that it was very scary. Although we didn't make the bad choices Andrews and his wife made, we could have. An ARM instead of a 30-year fixed mortgage and a home equity loan (or two) later, and we could have been in a similar situation.

I kept thinking as I read Busted that everything Andrews did made him sound like a gambler on a losing streak who, under the assumption that the odds have to change and his or her luck will soon turn, keeps doubling his bets so that he or she can recover what they've lost. That seldom if ever works at a casino; it didn't work for Andrews either.

The second and far more important book -- actually the chapters in between Andrews' account or his personal financial problems -- is Andrews at his best as a financial and economic writer. Here he provides interesting information and insight into what the mortgage lending industry did and why and makes much of what we've all seen the past few years far more understandable as a result.

For example, Andrews explains in a way I haven't seen elsewhere what motivated the industry to make so many subprime and Alt-A loans and to use loan products like payment option arms that we now know were so wrong and damaging. According to Andrews, the answer is actually quite simple: the industry made far more money from these loans because they carried a much higher interest rate than conventional mortgages made to the most credit worthy borrowers. There was little, if any, risk to the financial institutions that were buying these loans because they were quickly getting them off their books through securitization. Plus, there was so little experience with these loans that, regardless of their actual risk, it was easy for them to be considered and rated largely risk free.

In other words, there was a huge demand for these very profitable loans and lots of profit to be made from originating, selling, and securitizing them. As Andrews points out through some excellent reporting, it's anything but surprising that the market's increased demand for these loans created strong financial incentives to increase supply. To meet that supply, lending standards were seriously relaxed and loans were made to many who a few years earlier would never have qualified for what they were borrowing.

Andrews' reporting also raises an very interesting question in light of the Obama proposal for a consumer financial agency: Where were the regulators as all this was happening? The answer seems to be that they saw their primary job as the safety and soundness of the financial institutions so as long as these riskier loans (which at the time didn't appear to be that risky anyway) made a profit and were sold or securitized, the regulators didn't see them as a current or a potential problem.

On top of all of this interesting, infuriating, and scary information, Busted is very easy to read and well worth your time.

Full Disclosure: I know Ed Andrews and have talked with him many times over the years as he has reported on federal budget happenings.